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Competition between arm’s length and relational lenders: Who wins the contest?

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  • Drexler, Alejandro
  • Guettler, Andre
  • Taskin, Ahmet Ali

Abstract

Using geo-coded data with the location of bank branches and borrowers, we study the effect of bank competition on lending. The impact of competition depends on the incumbent’s and the entrant’s lending technologies. The addition of a relational lenders’ branch increases the probability of exit of and reduces the size of loans issued by all types of incumbents, while the opening of a branch by an arm’s length lender only affects the probability of exit from arm’s length incumbents. We believe relational lenders can compete more effectively by extracting and using private information unavailable to arm’s length entrants.

Suggested Citation

  • Drexler, Alejandro & Guettler, Andre & Taskin, Ahmet Ali, 2023. "Competition between arm’s length and relational lenders: Who wins the contest?," Journal of International Money and Finance, Elsevier, vol. 137(C).
    • Handle: RePEc:eee:jimfin:v:137:y:2023:i:c:s0261560623000980
    DOI: 10.1016/j.jimonfin.2023.102897
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    More about this item

    Keywords

    Banking; Lending technology; Spatial competition;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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